German Ifo business index rises more than expected

Key sentiment index underlines growth in Europe's largest economy

FRANKFURT, Germany (AP) -- A closely watched index of German business optimism rose more than expected in August, underlining improving growth prospects for the struggling euro area.

The Ifo index released Tuesday rose to 107.5 from 106.2 in July. Market analysts had expected 107.0.

The increase in the index — the fourth monthly rise in a row — is a further sign of Germany's improving economy, which expanded a robust 0.7 percent in the second quarter from the previous quarter and helped pull the 17-country currency union out of 18 months of recession. The eurozone expanded 0.3 percent from the quarter before.

However, economists say stronger growth is needed across the eurozone to reduce the region's record unemployment rate of 12.1 percent and cut the heavy debt burdens afflicting governments such as Greece, Spain and Italy.

Ifo survey director Kai Carstensen said in a statement that the German economy "moved up a gear" during the month.

Economists said the good Ifo reading suggests the German recovery may be more sustained than originally forecast by some and should continue through the second half of the year. Alexander Koch at UniCredit wrote that the survey data "confirm our view that the German economy will be able to maintain a somewhat more moderate but still robust momentum" in the second half.

Koch said that low unemployment in Germany — currently only 5.4 percent according to EU data service Eurostat — and strong demand for permits to start new buildings suggest that domestic demand would support growth. That comes on top of Germany's typical strength as an exporter of cars and machinery.

Timo Klein, senior economist at IHS Global Insight, said that "although the eurozone debt crisis is certainly not over, the various decisions taken by European policymakers since autumn 2012 continue to have a stabilizing influence for business confidence."

Those steps have included first steps toward a stronger, EU-wide system of banking supervision and a plan by the European Central Bank to purchase government bonds of indebted countries if they agree to take steps to reform their finances.

The Ifo index is based on a survey of 7,000 firms about their view of how things are now and their expectations for the months ahead.